Election Year Saves the Market

This election year has showed up just in time to save the market. Now, politicians won't play any games with the economy and the markets can be on relatively solid footing...for now, says Marc Gerstein of Forbes Low-Priced Stock Report.

For the past few months, I've been arguing that improved sentiment toward stocks does not depend on finding solutions to the macro problems that dominated much of 2011, or even that the steps toward solution be good ones.

Since the dawn of civilization, societies have faced challenges; war, famine, internal strife, and so forth. Yet somehow, through it all, the value of productive assets has managed to increase.

This hasn't by any means been a straight-line trend. Some periods have been worse—much worse—than others, and some periods have been relatively good.

But even the best of periods has not been trouble-free. (The 1950s through the late 1960s, for instance, are remembered as a boom period, yet the Cold War was at its most intense, our entanglement in Vietnam was spinning out of control, and domestic civil rights battles were in high gear.)

So when assessing conditions, we should not ask "Is this a good time to invest?" The answer, always, is "No." The proper question is whether the present is a significantly-worse-than-usual time to invest.

We had one of those very recently: 2008. The present is not one of them. That doesn't mean the recent rally will persist. Some sort of correction would be reasonable.

And volatility, which abated recently, is apt to spike almost without warning again and again, due not so much to world events (crises always come and go) but to structural changes in the nature of the stock market: larger blocks of money tending to move the same way at the same time.

This is something to which we must all adapt, either by tolerating it, or by muting it, such as I do with my 10% position in the Direxion Russell 2000 3X Bear ETF (TZA).

But looking at the big picture, I think things are OK. They're not great, but not so bad as to put them in the significantly-worse-than-usual category. Many might find that odd. Things still feel pretty bad, and we're likely to hear a lot more rhetoric of this nature as the presidential campaign heats up.

So let's try to separate fact from emotion. The latest readings in most economic indicators, although still below peak, are well above early-2009 troughs. For example:

Industrial production is 95.9, below the peaks of about 100, but well above the 83.9 trough.

Durable goods orders are 214.3, below the 245.1 peak, but well above the 148.7 trough.

Capacity utilization is at 78.6, below the peak near 87, but well above the 67.3 trough.

Annualized housing starts were above 2 million not long ago, but now stand at 699,000, very weak but above the 478,000 trough.

The unemployment rate should be in the 4% to 5% range; it peaked at about 10%, and presently stands at 8.3%. Initial unemployment claims normally run at a rate of 300,000-400,000 per week; they peaked at 659,000, and are now at 348,000. But this is related to one of the statistics that’s still very, very bad: median duration of unemployment. It had been running at 15-20 weeks pre-recession, but has lately soared to a horrible level near 40 weeks.

This, coupled with other employment-related factors (e.g. improvement in unemployment not so much due to hiring as to people dropping out of the work force and underemployment among many who returned to work), is the source of much of the negative aura that still surrounds the economy.

As I discussed in prior commentaries, stocks won’t wait till actual achievement of better employment data. What we need are indications that we’re moving, credibly if not brilliantly, in the right direction.

Given the election year, recent political precedent suggesting that even the most vociferous Congressional ideologues know enough to stop short of political suicide, and data showing business to be cranking up, there’s reason to expect we’ll get that.